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Sunday, November 1, 1998

When Indianapolis mayor Stephen Goldsmith set his sights on cutting that city’s regulatory code, he thought dog licenses would be an easy target. He was right--it took him just five years to get rid of the dog licensing rules.

The reform of local regulation across the nation is obviously long overdue. "Regulation kills the urban economy with a thousand pinpricks," says Goldsmith. More and more urban leaders are realizing that cutting red tape will revitalize their cities faster than bagging federal grants, gouging taxpayers for new stadiums and convention centers, or bribing large companies not to move. But between the idea and the reality falls the shadow, as T.S. Eliot wrote, and even the most aggressive reform mayors face huge roadblocks to sweeping deregulation.

Upon becoming mayor, Goldsmith discovered that Indianapolis’s regulatory code comprised 2,800 single-spaced pages and was filled with obsolete, even comical rules, such as requiring a city license for shooting pigeons or milking cows. Unlike federal regulations, which are promulgated by executive branch agencies, most local rules are city ordinances and cannot be eliminated or reformed by administrative fiat. Mayors must convince city councils to abolish or amend regulations through new ordinances. Unfortunately, anti-competitive special interests and territorial bureaucrats thrive in city council chambers like bacteria in a petri dish. So reform-minded mayors have to prod mulish city councils with the political equivalent of a two-by-four.

Most cities have no idea how much they spend simply administering and enforcing regulations. Many have established some form of regulatory review, but these processes typically assess the costs and benefits of proposed new regulations, leaving existing regulations undisturbed. Goldsmith and San Diego mayor Susan Golding have devised ways to open up the entire regulatory code to scrutiny. Both cities provide models for overcoming special-interest resistance and bureaucratic inertia.

Weeding Out

In Indianapolis, Goldsmith established a Regulatory Study Commission with a mandate to scrutinize the whole city code. The commission estimated that the city was spending $125 million a year administering its regulations. Reviewing every rule was impossible, so the commission concentrated on weeding out those that had the largest effect on business owners and citizens. The panel settled quickly upon four areas: taxi regulations, business and occupational licensing rules, development restrictions, and health regulations.

Taxicab regulation in Indianapolis had long followed the familiar anti-competitive story line. Taxis were scarce because the city had issued only 392 licenses, many of which had been "warehoused" by owners to stifle competition. Fewer than 250 actual cabs were prowling the streets, and five cab companies held 80 percent of the licenses. Service was poor and fares were high. The commission proposed sweeping deregulation that lifted the cap on the number of licenses, allowed price competition, and cut arbitrary rules (such a ban on "cruising" for fares) that reduced the market for service.

To counter the resistance of entrenched interests, the commission mobilized individuals who favored reform to testify before the city council and educate the news media. The most powerful advocates were minorities who wished to break into the taxi business and disabled people who were harmed by poor service; these groups also helped win the vital support of the Urban League. Especially potent was the testimony of James Chatman, a cab driver for 25 years who had repeatedly been denied a license to operate his own taxi. Prior to the city council vote, Chatman made the rounds of local TV stations to plug deregulation. The city council finally passed the reforms by a vote of 21 to 7. Henceforth the taxi business in Indianapolis will be open to anyone who can secure a driver’s license and insurance, meet vehicle safety standards, and pay a $102 fee.

The results were immediate and dramatic. Within 30 days, the number of companies operating taxicabs increased 50 percent. There are now about 70 companies (40 of which are owned by women or minorities) operating 500 taxis. Fares fell by about 10 percent. The average waiting time was cut in half and complaints about service dropped. Taxi drivers are now paragons of civility; it is not unusual to be greeted by a taxi driver wearing a tie instead of shorts and a T-shirt. (For a complete case study of Indianapolis’s taxi deregulation, see "Regulatory Reform at the Local Level," a paper by Adrian T. Moore and Tom Rose for the Reason Public Policy Institute, available at www.urbanfutures.org/ps238. html.) The Institute for Justice, a D.C.– based public-interest law firm, has opened up Denver’s regulated taxi business to minority drivers through litigation and public pressure; another suit is pending on behalf of jitney drivers in New York.

San Diego called a moratorium on new rules and began trimming its zoning code by a third.

The Regulatory Study Commission also trimmed business licensing regulations and fees. Its "Fair Fees for Business" initiative replaced annual license-fee regulations with a one-time, no-fee registration system, saving small business in Indianapolis more than $500,000 a year. Once again, the commission recruited hundreds of small businesses to express their support for the changes before the city council. Similar reforms of the building code have saved homeowners and builders $750,000 a year in fees. The commission experienced its only significant setback with health regulations, which are controlled not by the mayor and city council, but by an appointed health board not directly answerable to political authority.

Regulations Take a Holiday

San Diego has employed a similar approach to stimulate the local economy. San Diego was among those California cities that suffered disproportionately from the cutbacks in military spending and the contraction of the aerospace industry in the early 1990s, when California’s economy went over a cliff. In 1993, the year Susan Golding became mayor, Fortune magazine ranked San Diego 57th out of 60 major cities in the U.S. for business climate and job creation. Golding was dissatisfied with the usual strategy of targeted business incentives and enterprise zones. "As far as I am concerned," she said in 1994, "none has been radical enough. If you want a great enterprise zone, look at Hong Kong."

Golding started her reform efforts by imposing a one-year moratorium on new regulations and fees. Then she initiated periodic "Regulatory Relief Days," when the city council would review and reform existing regulations. The city is currently trying to trim the zoning code by 140,000 words--or more than a third--including 48 parking requirements, 78 sets of outdoor storage and signage regulations, and 15 different driveway width rules. The city council has adopted the changes and is now fighting a recalcitrant California Coastal Commission, which has final authority over the zoning codes of all coastal cities in the state.

During other Regulatory Relief Days, Golding and the council have modernized the fire code in a way that saves commercial buildings and warehouses thousands of dollars (Philadelphia has made the same reform), eliminated permit requirements for many simple residential construction projects (Indianapolis has made a similar change, eliminating more than 7,000 permits a year), and reduced some environmental reporting requirements.

Rent-Control Tyranny

The most dramatic recent example of deregulation, surprisingly, concerns one of the most absurd urban regulations of all time in one of the most politically correct enclaves in the nation--rent-controlled Cambridge, Massachusetts.

To be sure, the citizens of Cambridge cannot take credit for this reform alone: The voters of Massachusetts did them a favor by voting in 1994 to abolish rent control throughout the state. Since that vote, average rents in Cambridge have doubled to just over $1,000 a month (raising rent toward the metropolitan average from an artificially depressed level). The pace of new residential construction, however, has grown by a third. A clause in the law that deregulated rent control exempted low-income tenants for the first two years, but fewer than 10 percent of existing tenants qualified. This confirmed claims by the critics of rent control that the beneficiaries of rent control were mostly the middle and upper classes (including the mayor of Cambridge, who had lived for 20 years in a rent-controlled apartment costing $421 a month).

"I never would have built [new houses] under rent control," one homebuilder told a reporter. Business activity in the town’s restaurants and retail stores is up sharply. Even the Washington Post noted in a front-page headline that abolishing rent control gave the city "A New Lease on Life."

The most important lesson from the experience of Indianapolis and San Diego is that reformers must organize public support for deregulation among the people who would benefit most, especially potential entrepreneurs. "New entrants to a market don’t exist spontaneously," observes Reason Foundation analyst Adrian Moore. "Reformers need to find potential customers and entrants to the market, and bring them before the city council."

The first U.S. city that seriously emulates Hong Kong will set the standard for prosperity.

It also helps, says Moore, to create an independent review panel truly committed to reform. Individual agencies are too attached to the status quo, and even the mayor’s staff is vulnerable to political and bureaucratic pressure. Along with political savvy, reformers need a review process that evaluates regulations by a consistent analytical method. This makes the process more transparent and accessible to the public. Lastly, urban reformers would do well to subject rules to a periodic review, insert sunset clauses into new regulations, and set limits on the total costs that an agency can impose on private parties. Reformers should note that the last two tactics have pitfalls, but they can still help regulators set more intelligent priorities.

Local deregulation is still in its infancy, but the efforts of reformers in Indianapolis and San Diego show that determined leadership can galvanize reform. There is no blitzkrieg in regulatory reform; it is more like trench warfare. But the first U.S. city that seriously emulates Hong Kong will set the standard here for urban revitalization and prosperity. The thriving underground immigrant economies of Los Angeles, Houston, and Miami--the ultimate deregulated markets--show deregulation’s enormous potential.

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